Residents of North Dakota have paid a property tax since before the state was a state, with the first such tax enacted in 1882 by the Dakota Territory Legislative Assembly. The Territory collected 1.5 mills, with another 2 mills going to counties within the territory and 1 mill designated for roads and bridges.

6/06/12 (Wed)

By Caroline Downs

Residents of North Dakota have paid a property tax since before the state was a state, with the first such tax enacted in 1882 by the Dakota Territory Legislative Assembly. The Territory collected 1.5 mills, with another 2 mills going to counties within the territory and 1 mill designated for roads and bridges.

When approved by voters on October 1, 1889, the North Dakota Constitution included provisions for property taxes and exemptions, with the state’s legislative assembly modifying those laws 33 times in the state’s history to provide exemptions and tax relief to citizens.

On June 12th, the state’s citizens will decide if the state’s constitution should say anything about property taxes at all. Measure 2 on the primary ballot seeks to amend the constitution to eliminate property taxes. The measure also requires the state legislature to devise a way to replace the lost revenue for the political subdivisions affected, including counties, townships, school districts, cities, park districts, fire districts and other entities.

“There would be over 500 pieces of Century Code that would have to be changed if Measure 2 passes, in some form,” said current District 6 Representative Glen Froseth, “which would be no small task in itself.”

Froseth has been a member of the legislature’s Finance and Taxation Interim Committee, which has been meeting since February to address the state’s role in funding political subdivisions which now rely to some extent on property taxes.

According to the Office of the State Tax Commissioner, North Dakota currently collects $812.2 million in property taxes per year for the 2011-2013 biennium. Of those funds, out-of-state property owners pay 16.7 percent of that, or $126.8 million, including $7.7 million in residential taxes, $29.2 million in agricultural taxes and $89.9 million in commercial property taxes.

Sales and use taxes generate $776.4 million each year for the 2011-2013 biennium, and the state income taxes raises $576.3 million each year for the same period.

Oil and gas fundsare already earmarkedEven though the outcome of Measure 2 has yet to be determined, the potential impact has forced the Finance and Taxation Interim Committee to discuss various options for replacing the funds. Proponents of Measure 2 have suggested tapping the oil and gas funds collected by the state. The Office of the State Tax Commissioner reports available oil and gas funds could be directed toward school districts. Counties, townships, cities and miscellaneous districts may have to rely on a combination of funds from sources such as alcohol and tobacco taxes, lottery and gaming revenue, oil and gas taxes, financial institutions and other state resources.

Froseth does not especially want to see the state rely on oil revenue, which is derived from a 5 percent production tax and a 6 1/2 percent extraction tax. For this biennium, with $2.042 billion collected by the state, $613 million of those funds are already committed to the Legacy Fund.

“All the oil and gas money is earmarked,” said Froseth.

Another $100 million is required for the state’s oil and gas impact fund, $100 million to the common schools trust fund, and $100 million to the foundation aid stabilization fund for schools. Political subdivisions within the oil-producing counties receive $247 million, and the resources trust fund receives $200 million.

That leaves $642 million for the state, with $4 million of that total designated for the oil and gas research fund and nearly $342 million for property tax relief approved by the state legislature in 2007. “That buys 75 mills of funding for schools,” Froseth explained.

The state’s general fund can receive up to $300 million, with other allocations to the state disaster relief fund and the state’s strategic investment and improvements fund.

“And the amount of money we get from oil taxes isn’t a guarantee every year,” said Froseth. “It’s going to be a fluctuating tax source. Right now, it’s really good, but who knows what it will be?”

He also noted the oil and gas industry itself has already been preparing to introduce legislation for the 2013 session to lower production and extraction taxes. “They want to push the tax from 11 1/2 percent to a flat 9 percent,” he said. “I don’t know if they will be successful or what kind of support they’ll get. I think the legislature will see the needs in the western part of the state.”

The state tax commissioner’s office predicts other taxes in the state would need to increase in order to replace funds lost by abolishing the state’s property tax. At this time, State Tax Commissioner Cory Fong estimates the sales tax rate would have to double from 5 to 10 percent and the personal income tax rates would increase from current 1.51 to 3.99 levels to levels ranging from 5.72 to 15.11 percent. Corporation income tax rates are projected to increase from current levels of 1.69 to 5.15 percent to levels of 13.9 to 42.2 percent.

Option forproperty tax reliefThe Finance and Taxation Interim Committee agrees some sort of property tax relief may be necessary, and the committee drafted legislation at the end of May to do so.

“It’s a preliminary bill,” Froseth said. “This would only be for the primary residence of property owners living in the state of North Dakota. No commercial property and no agricultural property. The bill would provide relief on the first $75,000 of the taxable valuation of the residence, and if the owner is over 65, it would cover up to $125,000 of the taxable valuation.”

The committee estimated the legislation would provide another $400 million in property tax relief. “This would be about $800 million per biennium in property tax relief,” Froseth said, “and we wouldn’t be increasing any other taxes to do it.”

The draft bill will be forwarded to the state legislative assembly in January for consideration.